Tesla drives California environmental credits to the bank

Jerry Hirsch, Los Angeles Times

When Tesla Motors reports its first-ever profit Wednesday, much of the money will come courtesy of the state of California.

In its zeal to push electric cars into the market, the state has created a system in which Tesla can make as much as $35,000 extra on each sale of its luxury Model S electric sports sedans. That's because the Palo Alto company qualifies for coveted state environmental credits that it can turn into cash.

These Zero Emission Vehicle credits could put as much as $250 million in Tesla's coffers this year, according to one Wall Street analyst, and they are a key reason the 10-year-old automaker has survived this long. Tesla gets to sell the credits to other automakers that need them to satisfy tough California regulations.

Tesla's windfall highlights just how far California regulators have gone to promote the electric car — with a system that promotes the sale of trendy $100,000 sports sedans.

"At the end of the day, other carmakers are subsidizing Tesla," said Thilo Koslowski, an analyst at Gartner Inc.

It's the product of an environmental philosophy that prizes electric vehicles above all other green cars. Although conventional automakers have made great strides in selling cleaner autos — the Toyota Prius is the bestselling vehicle in California — regulators believe the only way to cleaner air is through vehicles that produce no pollution at all.

The state's Air Resources Board has mandated that such vehicles comprise 15% of new-car sales by 2025 — up from less than 1% now.

Tesla declined to comment on the help it gets from the government. But it has clearly used the regulations to its benefit. The credits, coupled with state and federal incentives to buyers, can add as much $45,000 for each Model S sold. No other automaker in the country enjoys such an advantage.

Tesla has used the money well to establish itself. Wealthy, eco-conscious buyers are snapping up the company's fast, stylish sedans as fast as the company can build them. The company sold 2,650 vehicles in 2012 and expects to sell 20,000 this year.

In contrast, big automakers such as Ford Motor Co. and General Motors Co. are attempting to build smaller, more affordable electric cars. But the prices remain high compared with similar gasoline-powered cars, and average consumers have balked at electric cars' limited range and long recharging times. The automakers are losing money in the electric car business, according to analysts.

Take the case of Chrysler Group. Its Fiat brand is about to release the electric version of the subcompact Fiat 500. Even with the help of subsidies, Chrysler will lose about $10,000 on every sale of the $32,000 car.

In a speech to automotive engineers last month in Detroit, Chrysler Chief Executive Sergio Marchionne called the transactions "masochism to the extreme."

"I believe that we could continue to explore the potential of electricity, but without being strong-armed by regulators," he said.

Robert Bienenfeld, Honda's U.S. environment and energy strategist, called for an approach similar the one used in Europe. There, regulators give each automaker a pollution standard based on sales volume and let them figure out what mix of cars will meet it.

Honda Motor Co. already produces a wide variety of eco-friendly cars: electric, hybrid, plug-in hybrid, natural gas and hydrogen fuel cell. Under a European-style system, the automaker would be free to adjust that mix to suit consumer demand and its own business model, Bienenfeld said.

"California is the only entity telling automakers what cars to produce," he said.

Carmakers have a long history of opposing tougher environmental regulations in California. The state's chief air quality regulator said zero-emission vehicles were crucial to meeting looming federal deadlines and denied favoring any particular automotive technology.

"We are in the air pollution business, not the car business," said Mary Nichols, chairwoman of the Air Resources Board, which has broad control over environmental policy in California. "There is some jealously of Tesla going on here."

She said the state must meet an Environmental Protection Agency deadline of 2023 to clean up its lousy air or risk losing federal highway funds and face other penalties.

Some environmental experts say that government intervention is needed to prod automakers to produce clean vehicles.

"If we want to prevent the worst effects of climate change, we need an 80% reduction in greenhouse gases by the 2050 time frame," said Don Anair, research director for the clean vehicles program at the Union of Concerned Scientists. To achieve that, car companies need to get started now to perfect technology for zero-emission vehicles, he said.

The car companies are complying with the regulations, but their lobbying arm, the Alliance of Automobile Manufacturers, has petitioned the EPA to block California's ambitious requirement.

"The ZEV mandate is a field of dreams mandate — if you build it they will come," said Gloria Bergquist, spokeswoman for the alliance. "There is a requirement that we build these vehicles and put them on dealers lots, but there is no requirement that consumers buy them."

Automakers are doubtful they can meet California's ambitious goals without taking big losses or getting even bigger government subsidies. Even Nichols, the California regulator, acknowledges that the board may have to adjust or delay its target based on market realities.

For now, the big automakers have some leeway to sell electric cars at a loss because they sell so few of them and the overall auto market is healthy, said Brian Maas, president of the California New Car Dealers Assn. "But if we go back to the type of recessionary market we had in 2008 through 2010, the manufacturers will not be able to sustain selling these cars at a loss," he said.

Moreover, the auto brand franchise agreements dictate that dealers have to buy a certain number of each car a manufacture makes.

"If no one comes to buy them, they are going to lose money," Maas said, "because it is just sitting on the lot."